2023 Q2 Quarterly Shareholder Report

NOTICE TO STOCKHOLDERS

The shareholders’ investment in Farm Credit of Southern Colorado, ACA is materially affected by the financial condition and results of operations of CoBank, ACB (CoBank). The 2022 CoBank Annual Report to Shareholders, and the CoBank quarterly shareholders’ reports are available free of charge by accessing CoBank’s website, www.cobank.com, or may be obtained at no charge by contacting us at:

Farm Credit of Southern Colorado, ACA

5110 Edison Avenue, PO Box 75640 Colorado Springs, Colorado 80970-5640 Phone Number: 800-815-8559

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited)

The followingdiscussionsummarizes the financialpositionand resultsof operations ofFarm Credit of Southern Colorado, ACA (the Association) for the sixmonths ended June 30,2023, with comparisons to prior periods. You should read these comments alongwiththeaccompanying financial statements and footnotes and the 2022 Annual Report toShareholders. The accompanying financialstatements were prepared under theoversight ofour Audit Committee.

Economic conditions in our territoryremainsteady with strong prices at the farm gatesupportingoverall economies in our rural communities. Inflation remains aconcernand rising interestrates continuetoimpactconsumers and producersalike. TheJune news release from the U.S. Bureau of Labor Statistics reported the Consumer Price Index for All Urban Consumers rose0.2 percent inJune and rose3.0 percentover the last twelvemonths.Theincrease is primarily driven byshelterand motorvehicle insurance. The food index increased by 0.1percentinJune after increasing 0.2 percent in the previousmonth. In addition,theenergy index rose 0.6 percentin June.

Due to rainfall throughout ourterritory duringthe secondquarter, droughtconditions havebeen alleviated. Baca Countyanda small portion ofProwers County remainunder United States Department of Agriculture (USDA) U.S. DroughtMonitor classificationof D0 (Abnormally Dry).Theremainder of ourterritoryhas received enoughmoistureto be classified with no drought conditions. Therehave been some severe storms during the second quarter,including hail and tornadoes, that haveadversely impacted producersin limited areas.

Grain and haymarketssoftened during thesecondquarter following favorable growingconditions andstrong yield expectations. However,inmidJuly, Russia announced its intention toexit the Black Sea Grain Initiative and cease allowing the export ofgrains from Ukraine’sBlack Sea ports.Thishas causedsupply concerns for global grain marketsand rallied farm gateprices for U.S. producers. Prices are stillmaintaining profitable levels for commodities grown inourterritory.

The livestock producers in ourterritory are experiencingexcellentweather, abundantgrass,and excellentgains for pasture cattle. Spring moistureconditions have improved rangeland conditions throughout the territory. Producers are expecting above average gains forcattle of all classes. Prices arestrong for stocker cattleand the national market offeredconsistent opportunities toprice cattle atprofitable levels throughout the second quarter. Values forfatcattle and feedercattlehave been on an upward trend through thesecondquarter.Marketsalsomaintainedstrong demand for quality bred heifers andcows.

The winter wheatcrop iscurrently reported by the USDANational Agricultural Statistics Service (NASS) as significantlybetter than lastyear with89 percent in fair toexcellent condition and 11percentin poor condition. Dueto the excellentmoistureconditions, the wheatcrop ismaturingslowerthan inprioryearsbut is stillexpected to produce better thanaverageyields.

Spring crops includingcorn,prosomillet,andmilo are alsoingoodcondition.Areas ofour territory did experience some delayed plantingduetorains; however,most producers wereableto meetplanting deadlines and the spring planted crops areinbetter than averagecondition.USDA NASS reports corn tobein 86 percent good toexcellent condition.

Potatoes are primarilygrownin the San LuisValley,which is in the southwestern regionofour territory. Prices remain strong and crop conditions areverygood. The San Luis Valley growers arebattling irrigation watersupply challenges and working towards a sustainableaquifer with water conservation practices.

Whilewe continue to experience strong demand for realestate inour territory, the marketcontinues toshowsignsof slowing. Increased interest rates, inflation, and overall economic slowdownhave erodedthe buyingpowerof consumersin the market. While realestate prices remainsteady,the market has slowed and bids are notas aggressive.We continue toobserve a shortageof agricultural properties availableon the market.Despitestrong demand for properties,we areexperiencing somesoftening in the loan marketas the risingrate environmenthas slowed demand for realestateloans.

Whilethe U.S. economyremains healthy,supply chaindisruptions,laborshortages,fuel prices, inflation, rising interest rates, weather relatedevents,and recessionpressures remaina concern. The rural economy continues to benefit from the strong U.S. economy, drivinghigher levelsofspending and investmentbybusinesses and consumers.Most agricultural commodity prices haveremained strong despitesome declinefrom the sharpincreases in 2022. The Russia/Ukraine conflicthas also impacted certain agriculturalcommodity prices and createdadditional volatilityanduncertainty inthemarkets. From amonetary policyperspective, the Fed has continued to fight inflationarypressure withinterest rate hikes, resulting in fourinterest rate increases in 2023of 25 basispointseach

and morepossiblein the future. Anticipation oftightermonetary policy is contributing toa strongerdollar andchanges in the shapeof the yield curve.

LOAN PORTFOLIO

Loans outstanding at June30,2023,totaled$1.46 billion,anincreaseof$12.6 million,or 0.9%, from loans of$1.45 billionat December 31, 2022. The increasewasprimarily due to an increaseinour purchasedparticipationsportfolio. The growth is primarily due toincreases inenergy andcommunication loans, partiallyoffsetby adecrease in processing andmarketingloans.

RESULTS OF OPERATIONS

Net income forthesix months endedJune 30, 2023, was $10.7 million,a decrease of$483thousand, or 4.3%, from the sameperiodended one year ago. Thedecreaseis primarilydueto increases in the provision forcreditlosses and noninterest expense, partiallyoffset by increases innetinterest incomeand noninterestincome.

For thesixmonthsended June 30,2023, net interest incomewas $20.4 million,anincrease of$2.2 million,or 12.2%, comparedwiththe six months endedJune 30, 2022. Net interest incomeincreased asa result ofanincrease in average accrual loan volume along with an increased returnon our loanable funds, partiallyoffset by adecrease in our average loanspread.

The provision forcreditlosses for thesixmonths ended June30, 2023,was$1.7million,anincrease of$1.9million from the credit lossreversal of$245thousand forthe sameperiod ended one yearago.The provision forcredit losses in2023 isprimarily dueto aspecific reserveon apurchased participationloan that movedto nonaccrual status in the first quarterof 2023. The creditloss reversal inthe firstsixmonths of2022 was primarily dueto an increaseincredit qualityacross ourportfolio and the utilization of the updated Combined System Risk Rating Guidance published in September 2021,partially offsetbyan increase inunfunded commitments.

Noninterestincome increased$157 thousand duringthefirstsix months of2023comparedwith the firstsix months of 2022primarily due to increases inloan fees and patronage distributions from Farm Credit institutions, partially offset by adecrease in other noninterest income.Theincreasein loan fees is primarily due tonon-deferrable fees earned on our purchasedparticipationloans. Patronage distributionfrom Farm Creditinstitutions increaseddue to an increaseinour CoBank patronage as a result of an increase inour averagenet notepayable to CoBank. The decreaseinothernoninterestincome is due toa decrease inallocated savings from our captiveinsurancecompany and adecrease in gains onfixed assets.

We receivedmineralincome of $546thousand during the first six months of 2023, whichisdistributed to us quarterly by CoBank.Theincrease for the sixmonths endedJune30,2023,compared with the firstsix months of 2022 is due to additional income during thereporting period from 15 newwells.

During the firstsix months of 2023, noninterestexpense increased $949 thousand to$12.1million, primarily due to increases in salaries andemployeebenefits, othernoninterest expense,and purchased services from AgVantis, partially offsetby a decreasein FarmCredit InsuranceFundpremiums. Salaries andemployee benefits increased $510 thousand primarily dueto anincrease insalaries,pension expense, and medical insuranceexpense,partially offset bya decrease inincentive expense. Othernoninterestexpense increased $328 thousandprimarily due to an increaseinemployeetrainingand public andmember relations expenses. Purchased services from AgVantis increased $125 thousand dueto anincrease in the annualsubscription fee. Farm Credit System Insurance Corporation (FCSIC)premiums decreased$56 thousand for the sixmonths endedJune 30,2023compared with the same period in 2022primarily due toa decrease intheinsurancepremium accrual assessment rateon Systemwide adjustedinsured debt from 20basis points to 18basispoints.

CAPITAL RESOURCES

Our shareholders’ equity atJune 30,2023, was $309.0million, anincrease from $290.8 million at December 31, 2022.This increase isdueto net income of$10.7 million, netstock issuances of $5.2million, and$2.2million recognized from the January1, 2023 adoption ofthe newstandardon current expectedcredit losses (CECL)

OTHER MATTERS

EffectiveJanuary 1,2023, ourAssociationadoptedthenew standardoncurrentexpected creditlosses (CECL), under which the allowanceismeasuredbased on management’s best estimate ofcurrentexpected creditlosses over the remaining contractual lifeof theloan. Priorperiods presented reflectmeasurement of the allowance based on management’s estimate ofprobableincurred creditlosses. For more information,see Note 1 – Organization and Significant Accounting Policies.

On March 5,2021, the UnitedKingdom’s Financial ConductAuthority (UKFCA) formally announcedthatallLondon Interbank Offered Rate (LIBOR) tenors will eitherbe discontinuedor nolonger be representative immediately after December 31, 2021.As aresult, the UKFCAhas closely worked withmarket participants and regulatoryauthorities

aroundtheworldto ensure that alternatives toLIBOR areavailableand thatexisting contractscanbe transitioned onto these alternatives tosafeguard financial stability and marketintegrity.

At June 30, 2023, our Association did not holdany legacy LIBOR indexed loans in ourcoreportfolioand these developments didnot haveamaterial impactonthe Association andour borrowers. Our Associationcurrently holds legacyLIBOR indexed loans in participations we havepurchased. Wehave adopted a transition plan to reduce LIBOR exposures and stop the inflow ofnew LIBORvolume. Management has documented and worked throughthe LIBOR transition plan with our funding bank andservice provider to address thephaseoutof LIBOR rates, including any updates to processes andloanservicingtechnology.

As our Association has embraced the trendof remoteand hybrid work over the pastfew years, our utilizationof space in our administrative office buildingin Colorado Springs has decreased. Inourcontinued efforts to be good stewards ofour resourcesandcapital, management presented, and the Boardof Directorsapproved a plan to sell the building. On August3, 2023,the Association executed acontract to listthebuilding forsale.

The undersigned certify they have reviewed this report, this report has been preparedinaccordancewithall applicablestatutory or regulatory requirements,andthe informationcontained hereinistrue, accurate,and complete to thebest ofhis orher knowledge and belief.

Whitney Hansen Board Chair August8,2023

Shawna R Neppl CFO August8,2023

Jeremy M Anderson President & CEO August8,2023

Consolidated Statement of Condition

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statement of Comprehensive Income

For the three monthsFor the six months

ended June 30 ended June 30

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statement of Changes in Shareholders' Equity

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

A description of the organization and operations of Farm Credit of Southern Colorado, ACA(the Association), the significantaccounting policiesfollowed, and the financial condition and results of operations as of and fortheyear endedDecember 31,2022, are contained in the 2022 Annual Reportto Shareholders. These unaudited second quarter2023 financial statements shouldbe read in conjunction withthe2022 Annual Report to Shareholders.

The accompanyingunaudited financial statements have been prepared in accordancewithaccountingprinciples generally acceptedin the U.S.(GAAP) for interimfinancial information.Accordingly, theydo not includeallof the disclosures required by GAAPfor annualfinancialstatementsandshouldbe read in conjunction with the audited financial statements as of and for theyear ended December31, 2022, ascontainedin the 2022 Annual Report to Shareholders.

In theopinion ofmanagement,alladjustments,consisting ofnormal recurring adjustments necessary for afair statement of results for theinterim periods,have beenmade. Thepreparation of financialstatements inaccordance with GAAP requires management tomakeestimates and assumptions that affectthe amounts reported in the financial statements andaccompanying notes. Actual resultscould differfrom thoseestimates. The resultsof operations forinterimperiodsare notnecessarilyindicativeof theresults to be expected for the full year ending December 31, 2023.Descriptionsof the significantaccounting policies areincluded in the 2022 Annual Report to Shareholders. In the opinion ofmanagement, thesepolicies and thepresentation ofthe interim financial condition and resultsof operations conformwith GAAP andprevailingpractices within the bankingindustry.

Recently Adopted or Issued Accounting Pronouncements

The AssociationadoptedtheFinancial Accounting Standards Board (FASB)updatedguidanceentitled“Financial Instruments – Credit Losses:Troubled Debt Restructurings and VintageDisclosure”on January1, 2023.This guidance requires the creditorto determine whetheramodification results in a new loanora continuation of an existing loan,among otherdisclosures specific tomodifications with borrowersthatareexperiencing financial difficulties. The update eliminated the accounting guidance for troubled debt restructuringsby creditors and requires disclosureofcurrent periodgross write-offsby yearof originationfor financing receivablesand net investments in leases on aprospective basis.

The Associationalso adoptedthe FASB guidance entitled “Measurement of Credit Losseson Financial Instruments” (CECL) and othersubsequently issued accounting standardsupdates related to creditlosses on January 1,2023. This guidance replaced thecurrent incurred loss impairmentmethodology with a single allowanceframeworkthat estimates thecurrent expected creditlosses over the remainingcontractual lifeforall financial assets measuredat amortized costand certainoff-balancesheetcredit exposures. This guidance is appliedon a modified retrospective basis. This framework requiresmanagementtoconsider inits estimate of theallowance forcredit losses (ACL) relevanthistorical events, current conditions,and reasonableandsupportableforecasts that consider macroeconomic conditions.

The following table presents the balance sheetimpact totheallowancefor credit losses and capital upon adoption of this guidance on January 1, 2023.

(dollars in thousands)

December 31, 2022

CECL adoption impact

January1, 2023

In March2020, the FASB issued guidanceentitled “Facilitation of the Effects of ReferenceRate Reform on Financial Reporting.” The guidance provided optional expedients and exceptions for applying GAAP to contractsandother transactions affected by reference rate reform. The guidancesimplifies the accounting evaluation ofcontract modifications thatreplacea reference rate affected by reference rate reformandcontemporaneousmodifications of othercontracts related tothe replacementof the reference rate. In December2022, the FASB issued ASU2022-06, “Reference Rate Reform (Topic 848): Deferralof the SunsetDate ofTopic 848”. This ASUdefers thesunset date of

the guidanceinTopic 848 on reference rate reformfrom December31,2022 to December31, 2024.This ASU is effective upon issuance.Theadoption of this guidance did not have amaterial impact onour financialstatements.

Loans and Allowance for Credit Losses

Loans aregenerally carriedattheirprincipal amount outstandingadjusted forcharge-offs,deferred loan fees, or costs.Loanoriginationfees and directloanoriginationcosts are nettedandcapitalized,and thenet fee orcostis amortized over the average life of the related loan as an adjustmentto interest income. Loan prepayment fees are reported ininterest income. Intereston loans is accrued andcredited to interest incomebased onthedailyprincipal amount outstanding.

Nonaccrual Loans

Nonaccrual loansareloans forwhichthere is reasonable doubt that all principal and interestwill not be collected according totheoriginal contractual termsand aregenerallyconsidered substandard or doubtful, whichis in accordance with the loan rating model,asdescribedbelow.A loan isconsidered contractuallypast due when any principal repaymentor interestpaymentrequiredbythe loaninstrument is not receivedonor before theduedate. A loan shall remaincontractuallypastdueuntil it is modified or untiltheentire amount pastdue, including principal, accrued interest, and penalty interest incurred as the resultof past due status, is collected or otherwisedischarged in full.

Consistent withprior practice,loans aregenerally placedin nonaccrual status when principal or interestisdelinquent for 90 days (unlessadequately securedandin the process ofcollection), circumstances indicatethatcollection of principal and interest is in doubt or legal action, including foreclosureor other forms ofcollateral conveyance,has beeninitiated tocollect the outstandingprincipaland interest.At the time aloan isplaced innonaccrual status, accrued interestthatis considered uncollectibleis reversed (if accrued inthecurrentyear)and/orincluded in the recorded nonaccrualbalance (if accrued in prior years). Loans arecharged-off at thetime they are determinedtobe uncollectible.

Whenloans areinnonaccrualstatus,interestpayments received incash aregenerally recognized as interestincome if the collectability of the loan principalisfullyexpected andcertainother criteria aremet. Otherwise, payments received onnonaccrualloans are applied against the recorded investment in the loanasset. Nonaccrualloans are returned toaccrual status ifallcontractual principal and interest is current, theborrower is fullyexpected to fulfill the contractual repayment terms,and after remaining currentasto principaland interestfor a sustained period or havea recent repaymentpattern demonstrating future repayment capacity to makeon-timepayments. If previously unrecognized interest incomeexists at the timetheloanis transferred to accrual status,cash received at the timeof or subsequent tothe transfer shouldfirst be recorded as interest incomeuntilsuch timeas the recorded balance equals thecontractual indebtedness oftheborrower.

Accrued Interest Receivable

The Associationelected tocontinue classifying accrued interest on loans inaccrued interest receivableand notas part ofloans on the Consolidated Statement ofCondition. The Association hasalso electedto notestimate an allowanceoninterestreceivable balances because the nonaccrual policies in place providefor the accrual ofinterest to ceaseon a timely basis when allcontractual amounts arenot expected.

Loan Modifications to Borrowers Experiencing Financial Difficulty

Loanmodifications may be granted to borrowersexperiencing financialdifficulty. Modifications can bein the form of one or a combinationofprincipal forgiveness, interest rate reduction, other-than-insignificant payment delay or term extension. Covenant waiversand modifications of contingentacceleration clauses arenotconsidered term extensions.

Collateral-Dependent Loans

Collateral-dependent loans areloans securedby collateral,including butnotlimited to agricultural realestate,crop inventory, equipment, and livestock. CECL requires an Association to measure the expected creditlosses basedon fair value ofthe collateral at the reportingdate whenthe Associationdetermines that foreclosureisprobable. Additionally, CECL allowsa fair value practical expedient as a measurement approachfor loans when the repayment is expected tobe provided substantiallythrough the operation or saleof the collateral whenthe borroweris experiencing financial difficulties. Under the practical expedient measurement approach, the expected credit losses is based onthe difference between thefairvalueof the collateral lessestimatedcosts toselland the amortized cost basis of the loan.

Allowance for Credit Losses

EffectiveJanuary 1,2023, theACL represents the estimatedcurrent expected creditlossesover the remaining contractual lifeof the loans measured atamortizedcost andcertain off-balancesheet credit exposures.The ACL takes intoconsideration relevant information about pastevents, current conditions,and reasonableandsupportable

macroeconomic forecastsof future conditions.Thecontractual term excludes expected extensions, renewals, and modifications,unless the extension or renewal options are not unconditionallycancellable.The ACLcomprises:

 the allowancefor credit losseson loans (ACLL) and

 the allowancefor credit losseson unfunded commitments,whichispresented separately on the Consolidated Statementof Condition.

Determining the appropriateness of theallowanceis complex and requires judgment by managementabout the effect of matters that areinherently uncertain. Subsequentevaluations of the loan portfolio,consideringmacroeconomic conditions,forecasts,andother factorsprevailingat the time,mayresultinsignificant changesin the ACL in those futureperiods.

Methodology for Allowance for Credit Losses on Loans

The ACLL represents management’sestimate ofcreditlosses over the remainingexpected lifeof loans. Loans are evaluated onthe amortized cost basis, including premiums,discounts,andfairvalueadjustments.

The Associationemploysa disciplined processandmethodology to establish its ACLLthathas two basic components: first, an asset-specific componentinvolvingindividual loans that do not shareriskcharacteristics with otherloans and the measurement ofexpected credit losses for suchindividualloans;andsecond, a pooled component for estimatedexpected credit losses for pools of loans thatsharesimilarriskcharacteristics.

Asset-specificloans are generallycollateral-dependent loans (including those loans for which foreclosure is probable) and nonaccrual loans. For anasset-specific loan,expected creditlosses aremeasured as the differencebetween the amortized costbasis in the loan andthepresentvalue of expected futurecash flows discounted at the loan’s effective interest rate except that,forcollateral-dependent loans, credit loss ismeasured as thedifferencebetween the amortized costbasis in the loan andthefairvalue of the underlying collateral.The fairvalue of the collateral is adjustedfor the estimatedcostto sellif repayment orsatisfactionof aloanis dependenton the sale (rather than only on theoperation) ofthe collateral. Inaccordance with theAssociation’sappraisalpolicy, thefair value ofcollateraldependentloansisbased upon independent third-party appraisalsor oncollateral valuations prepared by in-house appraisers. When an updatedappraisal orcollateral valuation is received,managementreassesses theneed for adjustments totheloan’sexpected credit loss measurements and, where appropriate, records an adjustment. Ifthe calculated expected credit loss is determined to bepermanent, fixed,or non-recoverable, the creditloss portion ofthe loan willbecharged off against the allowance forcreditlosses.

In estimating the pooled componentof the ACLLfor loanpools thatsharecommon risk characteristics, loans are evaluated collectivelyandsegregated into loanpoolsconsidering the risk associated with the specific pool. Relevant riskcharacteristicsinclude reportingloan type,credit qualityrating, delinquency category, orbusinesssegment ora combination of theseclasses. The allowanceisdeterminedbasedona quantitativecalculation of theexpected life-ofloan loss percentage foreach loancategoryby considering the probability ofdefault,based on themigrationof loans from performing toloss bycredit quality rating ordelinquency buckets using historical life-of-loananalysis periods for loan types and severity ofloss, based on the aggregate net lifetime losses incurredperloanpool.A default is considered to haveoccurred ifthe lender believes theborrower willnot be able to pay its obligation infull or theloan is 90 daysor more pastdue. Due tolimited losshistory across theportfolio, the Associationusedpeerdata within theirquantitative adjustmentcomponentfor loan poolsthathaveexperienced minimallosshistory.

The pooled component oftheACLL alsoconsiders factors for each loan pool to adjust fordifferences betweenthe historical period used to calculate historical default and lossseverity rates and expected conditions over the remaining lives oftheloans inthe portfolio related to:

 lendingpolicies and procedures,

 national,regional, and local economicbusinessconditions, and developments that affect the collectability of the portfolio,including thecondition of various markets,

 the natureof the loanportfolio,including the terms oftheloans,

 the experience,ability, and depth of thelendingmanagement andotherrelevant staff,

 the volumeandseverity ofpast dueand adverselyclassified or graded loans and the volume of nonaccrual loans,

 the quality of the loan review and process,

 the value ofunderlying collateral forcollateral-dependent loans,

 the existence and effect ofanyconcentrations ofcredit and changes inthe level ofsuch concentrations, and,

 the effectof external factorssuchas competition and legal and regulatory requirements onthe level of estimated credit losses in the existing portfolio.

The Associationuses a singleeconomicscenario over reasonableandsupportable forecast period of 12months. Subsequent to the forecastperiod, the Association reverts tolongrunhistorical lossexperiencebeyondthe12

months,utilizingan accumulated quarter method,to inform the estimateof losses for the remaining contractual lifeof the loanportfolio.

The economic forecasts are updated ona quarterly basis and incorporatemacroeconomicvariables, including agricultural commodity prices,unemployment rates, Gross Domestic Product (GDP) annual growth rates, government spending asa percentage ofGDP, real consumer spending, United States exports,inflation, andthefederal funds rate.

In addition tothequantitativecalculation,the Association considers the imprecision inherentin the processand methodology, emerging risk assessments, and othersubjective factors, whichmay leadtoa management adjustment to themodeled ACLLresults.Expected creditloss estimates also includeconsideration ofexpected cash recoveries on loanspreviously charged-off or expectedrecoveries oncollateral-dependentloans whererecovery is expected through saleof the collateral.The economic forecasts areupdated ona quarterlybasis.

Prior to January 1,2023, the allowance for loanlosses wasmaintained at alevelconsidered adequate toprovide for probablelosses existinginand inherentin theloanportfolio.The allowance was basedon a periodic evaluation of the loan portfolio in which numerous factors are considered, includingeconomic conditions,collateral values,borrowers’ financial conditions,loan portfoliocomposition,andpriorloan lossexperience.Theallowance for loanlosses encompassedvariousjudgments,evaluations, and appraisals with respectto the loans andtheirunderlyingcollateral that, by theirnature,containelements of uncertainty and imprecision. Changes inthe agricultural economy and their impacton borrower repaymentcapacity wouldcausethesevarious judgments, evaluations,and appraisals tochange over time. Managementconsidereda numberof factorsin determining and supporting the levelsof the allowances for loan losses, whichinclude, but are not limited to, the concentrationof lending in agriculture,combined with uncertainties associated with farmlandvalues, commodityprices,exports, government assistance programs, regional economic effects,andweather-related influences.

Allowance for Credit Losses on Unfunded Commitments

The Associationevaluatestheneed for an allowance for credit losseson unfundedcommitments under CECLand if required, an amount is recognizedand reportedseparately on the ConsolidatedStatementof Condition. The amount of expectedlosses is determined by calculatinga commitment usage factor over thecontractual periodfor exposures that arenot unconditionallycancellable by the Associationand applying theloss factorsused inthe ACLL methodology to the resultsof the usage calculation. No allowanceforcredit losses is recorded forcommitmentsthat are unconditionally cancellable.

NOTE 2 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

A summary ofloansfollows.

The Associationpurchasesand sellsparticipation interests with other parties in order todiversify risk,manage loan volume,andcomply with Farm Credit Administration regulations.The followingtable presents information regarding the balances ofparticipationspurchased and soldat June 30, 2023:

Credit Quality

Credit riskarises from the potential inability of an obligor tomeet its paymentobligationandexists inour outstanding loans, letters of credit,andunfundedloan commitments.TheAssociation managescredit risk associated withthe retaillending activities throughan analysis of thecredit risk profileof an individual borrowerusing its ownset of underwritingstandards and lending policies, approved by its boardof directors, which provides direction toits loan officers.Theretailcredit riskmanagement processbegins with an analysis of the borrower’s credit history, repayment capacity, financial position, and collateral,which includes ananalysis of creditscores forsmaller loans. Repayment capacity focuses on theborrower’s abilityto repay theloanbased oncash flowsfrom operations or other sources of income,includingoff-farm income. Real estate mortgage loans mustbe securedby first liens on therealestate (collateral). As required by Farm Credit Administration regulations, eachinstitution that makes loans ona secured basismust havecollateral evaluation policies and procedures. Real estate mortgageloans may be made only in amounts up to 85% oftheoriginal appraised valueof the propertytaken assecurity or up to 97% of the appraised value ifguaranteed by astate,federal, orother governmental agency. The actual loan to appraised value when loans are made is generally lower than thestatutory maximum percentage.Loans otherthan realestate mortgagemay be madeona secured orunsecured basis.

The Associationuses a two-dimensional risk ratingmodel based on an internally generatedcombined System risk rating guidance thatincorporates a14-pointprobability ofdefault rating scale to identify andtrack the probability of borrower default and aseparate scaleaddressing loss given default. Probability of defaultis the probability thata borrower will experiencea defaultduring the life of theloan.The loss givendefaultismanagement’s estimateas to the anticipatedprincipal loss on a specific loan assumingdefaultoccursduring the remaining life ofthe loan. A default is considered to haveoccurred if thelenderbelieves the borrower will not beable topay its obligationin full or the loanis90 days or morepast due. Thiscredit risk ratingprocessincorporates objectiveand subjectivecriteria to identify inherentstrengths, weaknesses,and risks ina particular relationship. The Association reviews, atleast on an annual basis, orwhena creditaction is taken, the probabilityof defaultcategory.

Each of the probability ofdefault categoriescarries adistinctpercentage ofdefaultprobability. Theprobability of default rate between oneand nineof the acceptablecategories is verynarrowand wouldreflectalmost nodefaultto a minimaldefault percentage.The probability of default rategrowsmore rapidly as a loanmoves from acceptable to other assetsespecially mentioned and growssignificantly asa loan moves toa substandard(viable) level. A substandard (non-viable) rating indicates thattheprobabilityof defaultisalmost certain. Thesecategories are defined as follows:

 Acceptable –assets areexpected tobe fully collectible and represent the highestquality.

 Other assets especially mentioned (OAEM)– assets are currently collectiblebutexhibit some potential weakness.

 Substandard –assetsexhibit someserious weaknessin repayment capacity, equity,and/orcollateral pledged on the loan.

 Doubtful –assetsexhibit similar weaknesses tosubstandardassets; however,doubtful assets have additional weaknesses inexisting factors,conditions, and values thatmakecollectionin fullhighly questionable.

 Loss – assetsareconsidereduncollectible.

The following table showsloans under the Farm Credit Administration UniformLoan Classification System asa percentage oftotal loans by loan type as of:

1 Prior to theadoption of CECL onJanuary 1, 2023, loans were presented withaccrued interest receivable.

Accrued interest receivableon all accruing loans atJune 30,2023has been excluded from the amortized costof loans and reportedseparatelyin the Consolidated Statementof Condition.

Nonperforming assets consistof nonaccrual loans, accruing loans90days ormore past due, andother property owned. The followingtableshows thesenonperforming assets and related creditquality statistics as follows:

1 Prior to theadoption of CECL onJanuary 1, 2023, nonperforming assets included accruing restructured loans. The Associationhadnoaccruing loans90days pastdueandno other property owned for the periods presented. The following tablesprovidethe amortizedcost fornonaccrual loanswithand without a related allowance forloan losses, as wellasinterest income recognized on nonaccrual loansduring the period:

The following tablesprovidean ageanalysisofpastdueloans atamortizedcost.

June 30, 2023

Prior to theadoption of CECL,the age analysis of past due loansincluded accruedinterestas follows:

31, 2022

A loan is considered collateral dependentwhentheborroweris experiencing financial difficulty and repayment is expected tobe providedsubstantially throughthe operationor sale ofthecollateral. Thecollateral-dependent loans are real estate mortgage loans and thecollateral is sufficientto cover theamountof the loans.

Allowance for Credit Losses

The credit risk rating methodologyisa key component of theAssociation’s allowance forcreditlosses evaluation and is generally incorporated into the Association’s loan underwritingstandards and internal lending limits. Inaddition, borrower andcommodity concentrationlendingandleasing limits have beenestablished by the Associationto managecredit exposure.Theregulatorylimitto asingle borrower or lessee is 15% of theAssociation’s lendingand leasinglimitbase, but the Association’sboard ofdirectors has generally established more restrictivelending limits. This limitapplies to Associations with long-term andshort-and intermediate-term lending authorities.

EffectiveJanuary 1,2023, theAssociationadoptedtheCECL accountingguidanceas describedin Note 1. A summary ofchanges in the allowanceforloan lossesis as follows:

For periods prior to January 1, 2023, theallowancefor loan losses was based on probable and estimable losses inherent inthe loan portfolio.

The Associationmaintains aseparate reserve forunfunded commitments, which is included inLiabilities onthe Association’s Consolidated Statement of Condition. The related provision forthe reservefor unfunded commitments is included as partof the provisionforcredit losses on the Consolidated Statement of Comprehensive Income,along with the provisionfor loanlosses. Asummary ofchanges in the reserve forunfunded commitments follows:

Loan Modifications to Borrowers Experiencing Financial Difficulties

Loanmodifications may be granted to borrowersexperiencing financialdifficulty. Qualifyingdisclosablemodifications are one ora combinationof principal forgiveness, interest rate reduction, forbearance,other-than-insignificant paymentdeferral or term extension. Covenant waivers and modificationsofcontingent acceleration clauses arenot considered term extensions. Other-than-insignificant payment deferrals may provide the borrower witha temporary paymentextension, which hasbeendefinedascumulative orindividualforbearanceor paymentdelay generally greaterthan or equal tosix months.Thesedeferred payments may be capitalizedinto the principalbalance ofthe loan andamortized with no extension of maturity orwiththe deferredpayment due atthe time of original maturity. The following table shows the amortized costbasisatJune30, 2023 forloan modifications granted toborrowers experiencing financial difficulty, disaggregated by loan type and type of modification granted. (dollars

in thousands)

Accrued interest receivable related to loan modifications granted toborrowers experiencingfinancial difficulty as of the three andsixmonths ended June 30, 2023 was $34 thousandand$80thousand, respectively.

The following table describes the financial effectof the modifications made toborrowersexperiencing financial difficulty during the three months endedJune 30, 2023:

Term orPayment Extension(in Days) Financial Effect

Productionandintermediate-term

Addeda weightedaverage of279 days to thelifeof the loans

The following table describes the financial effectof the modifications made toborrowersexperiencing financial difficulty during the sixmonths ended June30, 2023:

Term orPayment Extension(in Days)

Financial Effect

Productionandintermediate-term

Agribusiness

Addeda weightedaverage of280 days to thelifeof the loans

Addeda weightedaverage of911 days to thelifeof the loan

There were nodefaults in thesix months endedJune 30, 2023 onloans to borrowersexperiencingfinancialdifficulty that received a modification onor after January 1,2023, the date of adoption of theguidance “Financial Instruments–Credit Losses: Troubled DebtRestructuringsandVintage Disclosure.”

The following table sets forthan aging analysisof loans to borrowers experiencing financialdifficulty that were modifiedon or after January1,2023, thedate of the adoptionof theguidancenoted above,through June30, 2023:

Additional commitments tolend to borrowers experiencingfinancial difficulty whose loans havebeen modified were $461 thousand atJune 30, 2023.

Troubled Debt Restructuring

Prior to January 1,2023, the adoption of updated FASB guidanceon loan modifications, arestructuring of aloan constituteda troubled debt restructuring, alsoknownasformallyrestructured, ifthe creditor for economic or legal reasons related to theborrower’s financial difficulties granteda concessionto the borrower that itwould nototherwise consider. Concessionsvaried by program and wereborrower-specific and could includeinterest rate reductions,term extensions, paymentdeferrals,or theacceptance ofadditional collateral inlieu ofpayments. In limited circumstances, principal may have been forgiven. When arestructuredloanconstituted a troubled debt restructuring, theseloans were included within ourimpaired loans under nonaccrual oraccruingrestructuredloans.

The Associationhadno TDRs within theprevious 12 months and for which there were subsequent paymentdefaults at December 31, 2022.

The following table provides informationon outstandingloans restructuredintroubleddebtrestructurings.

(dollars in thousands)

Loans Modifiedas TDRs TDRs in Nonaccrual Status* December 31, 2022 December 31, 2022

Real estate mortgage $ 399 $ –

Total $ 399 $ –

* Represents the portion of loans modified as troubled debt restructurings that were innonaccrual status

NOTE 3 – CAPITAL

Our Association’sunallocated retained earnings for the quarter endedJune30,2023 reflects anincrease from the cumulativeeffectof achange in accounting principlefor CECL on January1, 2023.The impact of adoption was not material to the Association’scapital ratios. Asummary ofselectcapital ratios based on a three-month average and minimums setby the FarmCredit Administration follows.

If capital ratios fall below the regulatoryminimumplus bufferamounts, capital distributions(equity redemptions,cash dividend payments, and cashpatronage payments)anddiscretionarysenior executivebonuses arerestricted or prohibited withoutpriorFCAapproval.

NOTE 4 - FAIR VALUE MEASUREMENTS

Accounting guidance defines fair valueas the exchange price that would be received for an assetor paid to transfera liability in the principal ormostadvantageous market for the assetor liability. See Note 2 of the 2022 AnnualReport to Shareholdersfora more complete description.

Assets measured at fair valueon a recurringbasisaresummarized below:

The Associationhadnoliabilities measuredat fair value on a

Assets measured at fair valueon a non-recurringbasis for each ofthefairvaluehierarchy values aresummarized below:

With regardto impairedloans,it isnotpracticable toprovidespecific information on inputsas eachcollateral property is unique. System institutions utilizeappraisals tovalue these loans and takes into accountunobservable inputs such as incomeand expense,comparablesales, replacementcost, andcomparabilityadjustments.

The Associationhadno liabilities measuredat fair value on anon-recurringbasisat June30, 2023 or December31, 2022.

Valuation Techniques

As morefully discussedin Note 2 ofthe2022 Annual Reportto Shareholders, accounting guidanceestablishes a fair value hierarchy, which requires an Association tomaximize the use ofobservable inputs and minimize theuse of unobservableinputs whenmeasuring fairvalue. The following presents a briefsummaryofthe valuation techniques usedbythe Association forassets andliabilities,subject tofair valuemeasurement.

Assets Held in Non-Qualified Benefits Trusts

Assets heldin trustfunds related todeferredcompensationand supplemental retirementplans are classifiedwithin Level 1.Thetrustfundsinclude investmentsthatareactively tradedand have quoted net assetvalues that are observablein the marketplace.

Loans Evaluated for Impairment

For impaired loansmeasuredon a non-recurringbasis,thefair value isbased upon theunderlyingcollateral sincethe loans arecollateral-dependentloans. The fairvalue measurementprocess uses independent appraisals and other market-basedinformation, butin many cases, italso requiressignificant inputbased on management’s knowledge of and judgmentaboutcurrent marketconditions, specific issues relating tothe collateral,andothermatters. As aresult, these fairvalue measurements fall withinLevel 3of the hierarchy. When thevalue ofthecollateral,less estimated costs to sell,is less thanthe principalbalance ofthe loan, aspecificreserveisestablished.

NOTE 5 - SUBSEQUENT EVENTS

The Associationhas evaluatedsubsequenteventsthrough August 8,2023, which is the date the financialstatements were issued, and no material subsequent events wereidentified.